A budget deficit could be the last straw for the ailing Thai economy, Thanong Khanthong reports.

The warning signals have been flashed that Thailand faces its first budget deficit in a decade, an event that could trigger another assault on the baht.

Analysts have warned that Thailand should not invite another round of baht speculation by flouting its fiscal discipline. In February the baht came under fierce attack because currency speculators saw cracks in Thailand's fiscal outlook. While the Bank of Thailand staunchly defended the baht, it spent US$2 billion (Bt52 billion) of its international reserves in doing so.

Fiscal discipline has been one of the three cornerstones of Thailand's macroeconomic stability, in addition to monetary discipline and a currency peg system. Balancing the budget is the key to maintaining the integrity of the currency peg system, which has so far ensured the baht's stability and attracted foreign investment.

But now it seems that the banking authorities have exhausted their monetary tools. Interest rates will have to be kept high at least through this year, to defend the currency. Nevertheless, the baht could come under attack again at any time due to eroding confidence in macroeconomic conditions. Fiscal imprudence will kill the last hope for the economy.

Faced with an economic slowdown and poorer corporate earnings, the government is expecting a revenue shortfall. Both Finance Minister Amnuay Viravan and Chatu Mongkol Sonakul, the permanent secretary for finance, have admitted that the country may run a budget deficit because revenue collection has fallen below expectations in the first four months of the year.

Initially, the Finance Ministry projected a revenue shortfall of about Bt59 billion for the fiscal year, but it is now looking at the grim reality of a shortfall approaching Bt125.90 billion. Already, Amnuay has won a big political fight by calling on the government to slash the budget from Bt984 billion to Bt925 billion.

It now appears that even these spending cuts will not be deep enough to maintain a balanced budget or to give the Bank of Thailand the room it needs to lower interest rates. Thailand's prime rate of 12.75 to 13.15 per cent is among the highest in the region.

Fiscal discipline is of the utmost importance for Thailand because it is the key to enhancing public savings at a time when private savings increases are minimal.

A 1997 fiscal budget deficit will create a ''triple deficit" scenario, which will virtually wipe out all the remaining confidence in the macroeconomy. The other two deficits are the trade deficit and the current account deficit.

At this point, Finance Ministry officials are not certain themselves as to how to raise additional revenue to balance the government's cheque book. Chatu Mongkol has cited an increase in the luxury tax as one option. Issuing government bills at this juncture is almost out of the question.

Another option for balancing the budget is for the government to dip into its fiscal reserves, which stand at about Bt300 billion. This method will create a bad precedent, encouraging further imprudent fiscal policy.

The most effective way to balance the budget is for the government to further tighten its belt or to call for an immediate moratorium on public spending. Lacking a political base, Amnuay has found it difficult to get this message across to the drifting Cabinet.

Only strong leadership from the CEO of Thailand, Prime Minister Chavalit Yongchaiyudh, can avert the looming economic disaster. It comes as a big surprise that despite his firm grip on power, the prime minister has opted to put the economic crisis behind other less important agendas in his diary of leadership.

Dr Trairong Suwannakhiri, a Democrat MP from Songkhla, hit the nail on the head when he lashed out at the economic team of the Chavalit administration, warning that if the economic ills cannot be cured, the baht will come under attack again in the next two months.